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Making Sense

December 10, 2008 > Print Edition > Editorial Pages

Start Making Sense

Monday, December 8, 2008

THERE IS a certain unreal quality to current debate over the state of the U.S. economy, national security and the environment. As Detroit's Big Three automakers approach bankruptcy, dangerous oil-exporting states threaten international stability and climate change continues unchecked, Congress and the incoming Obama administration ponder costly and complex proposals to address these related crises. Under consideration are tens of billions of dollars in loans to the car companies; sanctions and diplomacy targeted at Iran, Russia and others; and a cap-and-trade system for carbon emissions. Each of these may have its place. What's striking, though, is that the only idea that seems to be off the table is the one that would address all three concerns directly and efficiently: higher gas taxes. This step would stimulate the market for new fuel-efficient cars; defund mischief-making petro-states; and cut carbon emissions. Not only that, it would reduce traffic, curb urban sprawl and, by giving drivers an incentive to drive more slowly, improve highway safety.

Source: The Washington Post

December 20, 2008

Start Making Sense

This one is addressed to free market opponents of mandatory blends and carbon taxes because I see a lot of criticism directed at ethanol coming from these quarters. I should make a few reservations though right at the beginning. I am no socialist or something, I am generally pro market myself. Neither I support the ethanol subsidy, I would prefer other means to promote biofuels, such as taxes to fine gas stations that blend below targets established by the RFS and EISA. Now to the subject of this post.

There exists no coherent argumentation against either ethanol or carbon tax on the grounds of free markets. This is for a very simple reason that neither the energy market, nor agriculture (which is relevant here because of biofuels) are free markets. The first is distorted by tax breaks for oil companies, the latter by massive farm subsidies that derailed not one round of the global trade talks. Let alone that the oil market is being continuously manipulated by OPEC. That's why anybody arguing for exposing his country to the whims of the oil market should bear in mind - this is a soccer game with only one gate and the gate is on your side. The other, producing, side does not play by the free market rules.

As matter of fact, free markets simply don't exist in the nature and in this sense what we have is an approximation of free markets. One can argue for governments getting their hands off the markets and, in general, it seems to work, but we should always bear in mind that what we call free markets can be called such only with a stretch of imagination. For a market to be a free market according to the textbook definition of the term, there should exist no governments, no borders and no OPECs. No entry barriers, no taxes and no subsidies.

In a real free market no government has any business of spending billions on foreign policy and sending its armies across oceans to secure oil supplies for its citizens. Neither in a real free market anybody pays any taxes to finance wars on terror, containing Russias and Chaveces. In a real free market such things should not exist and consumers should either pay all these expenses themselves or be left on their own to suffer from the instability of these markets and their occasional inaccessibility.

Now, given that we are not living in a perfect world and the markets are never truly free, what we have is a government that imposes taxes on its citizens to finance one of the most expensive foreign policy projects in human history with the costs of this project running in trillions. It does not take a genius to see that a lion's share of the US foreign policy is connected to oil because so much of it is directed at securing stable and uninterrupted supplies of carbon fuels both to the US and the the rest of the world by policing the Middle East. Much of this foreign policy is also about containing enemies and rogue states, the overwhelming majority of which are petro-nuts. In this sense policing the Middle East, whether it's confronting enemies such as Iran or Al-Kaida or supporting America's pseudo friends in the region such as the "moderate" Arab regimes, is absolutely part of the costs involved in procuring oil for US consumers.

Containing Chavez or Russia's neo imperial ambitions should be also regarded as costs incurred on the US by its oil consumption as both can be said to receive a subsidy from the US through American drivers and other gasoline consumers. In fact, I can easily expand the list to demonstrate how most of the foreign policy costs are inflicted on the US by consumption of oil derived products.

Now I said taxes, so lets talk about taxes. Even if we admit that no economy can be called a real free market economy if it has taxes, we can still agree that taxes should make sense economically. Obviously the very fact that taxes exist is already distorting markets, but even when taxes exist, taxation system can be at least structured in a way that somehow approximates the economic reality involved in producing and consuming certain goods. And if we have a state having to bear additional costs to allow its citizens to consume something, then these costs should be somehow factored into the price of these goods unless we are talking about a welfare system which is a different story. In particular, what's relevant to the subject at hand is how much the taxes make the price of gasoline reflect its actual costs. And to put it mildly, the price has no relation to the reality whatsoever.

In an almost perfect world, almost because it's still no free market, all expenses involved in policing the Middle East, or containing Chavez and Russia, not to mention the cost of hurricane rescues and other stuff related to the global warming, would be consolidated into one single tax presented to gas consumers at the pump. Basically the government should slap a huge carbon tax on gasoline and diesel. At the same time it should drastically reduce income, VAT and other taxes, because there is really no reason to make people pay for consuming something that does not incur additional expenditures for the state.

What we have instead is a very badly designed taxation system that does not know how to bill the actual costs inflicted on the state by consumers of carbon fuels, into the market price of these goods. Basically we are talking about a massive waste of funds and resources on the part of the US government because of a subsidy with which the US government is supporting the domestic consumption of carbon fuels. This is because the US government does not make gas consumers pay the bill, but instead spreads the burden of supporting carbon consumption over the whole economy.

It's this fundamental flaw in the taxation system that does not distribute taxation burden properly which is confusing the markets and creating the illusion that free markets are all about pumping the Iranians, Arabs and Russians with petrodollars. This system is not only distorting the market, but it does so in such a way that, if left to its own devices, such a market invariably ends with a massive transfer of US wealth to rogue states and America's enemies around the globe.

Now I don't want to go into arguing about carbon tax being better than mandatory biofuels blend and such stuff, but I am ready to bet my house (a safe bet, since I have none) that a properly taxed gasoline should be way more expensive than ethanol and many other alternative energies. And I also want to say to free market opponents of carbon tax and biofuels, that whatever they have to say about all this, it has nothing to do with free markets. There is no free market in these issues because you can't call the ugly reality inflicted on us by this poorly structured and wildly hallucinating taxation system free market, but at least carbon tax and mandatory blends reflect much better what's happening in the real economy than the non existent free market adored by your free market crowd.

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